A Simple Model of Speculation- The Welfare Analysis and Some Problems in the Decision Making Theory

Abstract

This article analyzes the effect of speculation on the economic welfare from various criteria, using a simple Edgeworth box within a three-period Walrasian competition framework. Here “speculation” is defined as a series of transition processes of each agent’s spontaneous production of private information, the exchange of commodities based on it under the externality environment, and finally its spillover into public. The methodology and implications are closely related with the concepts of herd behavior by Banerjee (1992), informational externality by Stein (1987), information sharing by Shapiro (1985), and economic value of speculation by Hirshleifer (1971, 1975, 1977). It is explicitly shown that the complete sharing of produced information under externality environment, if not accompanied by almost sure productivity effect, does not necessarily attain the non-negative economic value especially in terms of ex-ante expected utility. The implication is consistent with Aoki (2005). Lastly some criticisms about why this could happen are discussed.

Item Type:

MPRA Paper

Original Title:

A Simple Model of Speculation- The Welfare Analysis and Some Problems in the Decision Making Theory

English Title:

A Simple Model of Speculation- The Welfare Analysis and Some Problems in the Decision Making Theory

Arrow, K.J. (1962) “Economic Welfare and the Allocation of Resources for Invention”, The Rate and Direction of Inventive Activity: Economic and Social Factors, National Bureau of Economic Research, Princeton University Press, pp.609-626.

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Aoki, Takaaki (2000) “Models of Equilibrium Pricing with Internalized Powers of Independent Judgment Based on Autonomy”, mimeo, February 2000.

Aoki, Takaaki (2003) “A Simple New Model of Speculation- The Welfare Analysis and Some Problem in the Decision Making Theory”, mimeo (The First Version), April 2003.